Banks led by JPMorgan Chase & Co reaped a bonanza of underwriting fees from debt and equity capital-raisings in the third quarter but a deepening slump in M&A activity depressed overall investment banking fees.

Fee income from underwriting has become an important driver of bank profits this year, helping to offset big credit losses.

Companies handed $8.9 billion in underwriting fees to banks in the quarter, up 65 percent from a year ago, according to Thomson Reuters data, as they took advantage of lower financing costs and the return of investor interest in riskier securities such as high-yield bonds.

It was the quarter where the markets definitively moved from the legacy of the crisis into full-blown recovery mode, said Therese Esperdy, global head of debt capital markets at JPMorgan in New York.

Issuance of high-yield bonds picked up in the United States and Europe, and there was also an uptick in initial public offerings at the end of the quarter.

The banks look set to parlay this capital markets recovery into profits.

JPMorgan, the second-largest U.S. bank, tops the league tables for both equity and debt underwriting fees for the year to date, at $1.6 billion and $1.1 billion respectively.

In the first three quarters of last year, JPMorgan had earned equity underwriting fees of $986 million and debt underwriting fees of $1 billion.

Bank of America Corp , the largest U.S. bank, ranks second for debt underwriting, having taken in $963 million so far this year, while Morgan Stanley ranks second for equity underwriting, with $967 million in fees.

RECORD ISSUANCE

Companies raised $168.9 billion in debt globally in the third quarter, taking the total for the first nine months of 2009 to a record $814.9 billion, the data showed.

The combination of low interest rates and narrowing credit spreads has made financing cheaper for companies.

It is not clear how long this will continue, however.

My sense is that there's been a fair amount of issuance that's been pulled forward from the fourth quarter to now to take advantage of market conditions, said Jim Probert, head of Americas investment-grade syndicate at Bank of America.

As a result, I think there's a good chance that supply will begin to decline as we approach the end of the year fourth quarter because it's been pulled forward.

And fees from debt and equity underwriting alone will not make up for the slump in M&A activity.

Global investment banking fees including M&A and loan fees fell 34 percent in the third quarter compared with the second quarter. Year-to-date fees are down 24 percent from last year.

There is hope, however, in the pipeline of planned equity offerings, which now stands at $191.5 billion, according to the Thomson Reuters data.

Encouragement can also be found in the high-yield debt markets. U.S. issuers raised $25.8 billion in this market in the third quarter, up from $19.7 billion in the second, while European issuers raised $9.6 billion, up from $2.8 billion.

If we continue to see markets improving or even staying at current levels, then you will likely see more high-yield and emerging market issuers taking up any slack in the investment grade pipeline, said Mark Lewellen, head of European corporate origination at Barclays Capital.

(Additional reporting by Victoria Bryan; Editing by Ted Kerr)

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